15-05016 Dynamic Drywall, Inc. v. Hartford Fire Insurance Company et al (Doc. # 39)

Dynamic Drywall, Inc. v. Hartford Fire Insurance Company et al, 15-05016 (Bankr. D. Kan. Aug. 17, 2015) Doc. # 39

PDFClick here for the pdf document.






IN RE: )


DYNAMIC DRYWALL, INC. ) Case No. 14-11131

 ) Chapter 11

Debtor. )





 Plaintiff, )

vs. ) Adv. No. 15-5016






 Defendants. )







Dynamic Drywall, Inc. (DDI) filed an adversary proceeding against Hartford
Insurance, Inc. and Stinson Leonard Street (SLS) asserting a breach of contract claim
against the former and seeking a declaration that the latter is not entitled to an
attorney’s fee lien against the Hartford contract claim. After SLS answered and
waived its fees, effectively mooting the second claim for relief to determine the
attorney lien’s validity, DDI amended its complaint to add a third claim for relief.1
Plaintiff now says that SLS breached its fiduciary duty to plaintiff by failing to
segregate fees it billed for work on the Hartford litigation from fees it billed for other
matters and that if I find that Hartford did breach the contract, but that DDI can’t
recover because the fees weren’t segregated, SLS should be liable for whatever DDI
is unable to recover from Hartford due to the billing error. Both defendants have
moved to dismiss under Fed. R. Civ. P. 12(b)(6) as made applicable to adversary
proceedings under Fed. R. Bankr. P. 7012(b). DDI sought additional time to respond
to Hartford’s motion, but has failed to respond to SLS’s motion and its time to do so
has expired. For the reasons set forth below, SLS’s motion is GRANTED; Hartford’s
motion will be addressed in a separate order when the briefing is complete.2

1 See Fed. R. Civ. P. 15(a)(1)(B) as made applicable in adversary proceedings by Fed. R.
Bankr. P. 7015.

2 Defendant Stinson Leonard Street LLP appears by its attorney Nicholas J. Zluticky.
Plaintiff Dynamic Drywall, Inc. makes no appearance on SLS’s Motion to Dismiss.

Factual and Procedural Background

DDI’s causes of action arise out of years of prior state court construction
litigation commenced in 2006 surrounding DDI’s efforts to recover amounts under a
subcontract it claimed the general contractor Building Construction Enterprises, Inc.

(BCE) owed it for labor and materials provided on a Johnson County department of
corrections project bonded by Hartford. At the end of that litigation, in 2014, the
District Court of Johnson County, Kansas entered judgment against BCE, but not
Hartford, awarding certain attorney’s fees and expenses DDI incurred in pursuing
the claims. BCE is insolvent. On May 5, 2014, DDI appealed the fee denial as against
Hartford to the Kansas Court of Appeals. DDI filed its chapter 11 bankruptcy on May
21, 2014 and on August 6, 2014, I granted Hartford and BCE relief from the automatic
stay to defend the appeal.

3 Dkt. 38.

4 Building Construction Enterprises, Inc. v. Public Building Commission of Johnson County,
Kansas, et al., Johnson County District Court Case No. 06CV3708, Appeal No. 111820
(Kan. App.).

DDI’s claim against SLS, its former counsel in the state court litigation, is best
understood in context with its claim against Hartford in this matter. The general
contractor, BCE filed a state court lawsuit against the Johnson County Public
Building Commission (PBC) seeking to recover for unpaid labor and materials
provided in the construction of a correctional facility in Johnson County. DDI, also
unpaid and represented by SLS, intervened in that action to recover under its
subcontract with BCE. Hartford, as bond surety, issued the statutory payment and
performance bonds for the project. BCE filed a counterclaim against DDI. Their
subcontract provided that the prevailing party in any litigation to enforce the
agreement would be awarded its attorney’s fees and expenses. This state court action
began in 2006 and in February of 2010, DDI, Hartford, and BCE entered into a partial
settlement agreement providing that Hartford would pay $325,000 in full satisfaction

of DDI’s claims versus BCE and Hartford, but DDI’s attorney fee claim was excepted
from the scope of the settlement and the attendant releases.

5 Adv. Dkt. 17-1.

6 Adv. Dkt. 17-1 at ¶ 6.

7 Adv. Dkt. 17-3.

Hartford and BCE will not contest that DDI is entitled to attorney
fees . . . except that Hartford and BCE specifically reserve the right to
challenge the amount of the attorney fees based on the Subcontract and
Kansas law.6

DDI subsequently filed its attorney’s fees motion and, in 2011, the Johnson
County District Court conducted a three day evidentiary hearing on it. Both Hartford
and BCE objected to the motion. Hartford specifically contested that DDI could
recover attorney fees under the payment bond. Hartford challenged the fees claimed,
alleging first that as a Kansas surety, it is not liable to pay attorney fees because
those are not lienable labor and materials under KAN. STAT. ANN. § 60-1111, and
second, that not all of the fees claimed were specifically incurred by DDI in its pursuit
of the BCE recovery.

In April of 2014, the state court issued a lengthy reasoned order concluding
that DDI was not entitled to recover any fees from Hartford under the payment bond
and that it was only entitled to recover $378,662 of its $619,313 claimed fees against
BCE.7 The court specifically questioned whether all of the fees charged by SLS and
claimed by DDI were incurred in the course of the BCE litigation and denied those it
found were not. Then, in an odd twist, the state court stated that this amount could

be adjusted for “legal work not related to the claims and issues involved in the dispute
between BCE and DDI, which shall be determined at a subsequent hearing.”

8 Id. at p. 17.

9 Id. at p. 16.

10 Later in DDI’s bankruptcy, BCE and Hartford belatedly sought reconsideration of the fee
award as invited by the state court. On October 22, 2014, this Court denied their motion to
lift the stay to pursue that motion. See Dkt. 111.

11 Adv. Dkt. 17 at ¶ 2 and pp. 3-9 (First Claim for Relief).

12 DDI has obtained an extension of time to August 17, 2015 to file its response. See Adv.
Dkt. 33.

Now, DDI claims that Hartford breached the settlement agreement when it
challenged DDI’s right to recover attorney fees and expenses.11 Hartford has moved
to dismiss that claim and DDI has not, as of this writing, responded.12 As to SLS, DDI
says that if it can recover against Hartford on the breach claim, but is stymied by
SLS’s failure to properly segregate BCE-related fees from other non-BCE fees, it is
entitled to recover from SLS what it lost. Its legal theory is that SLS breached both

its fiduciary duty and its duty of care to DDI when it failed to heed DDI’s alleged
instructions to segregate the fees on its statements.

13 Adv. Dkt. 17, pp. 10-12 (Third Claim for Relief).

14 Adv. Dkt. 11.

15 Adv. Dkt. 26, 27.

16 Issa v. Comp USA, 354 F.3d 1174, 1177-78 (10th Cir. 2003). The consequence of not timely
filing a response to the motion to dismiss is that the party is deemed to have waived the right
to file an opposing memorandum. See D. Kan. Rule 7.4(b).

17 Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (In reviewing
the sufficiency of the complaint, the court assumes the truth of the plaintiff’s well-pleaded
factual allegations and views them in the light most favorable to the plaintiff.); Mobley v.
McCormick, 40 F.3d 337, 340 (10th Cir. 1994) (A Rule 12(b)(6) motion tests the sufficiency of
the allegations within the four corners of the complaint after accepting as true all well-

DDI initially sued SLS for a declaration that its attorney fee lien did not attach
to the above-described contract cause of action against Hartford. SLS answered and
waived its lien and attorney fee claim against DDI.14 DDI amended its complaint to
add as a second claim against SLS the professional liability claim described above.
SLS’s current motion to dismiss followed, to which DDI has filed no response.15

 Legal Standards for Rule 12(b)(6) Motions to Dismiss

An uncontested motion to dismiss may not be granted merely because the non-
moving party has failed to file a response.16 The purpose of a motion to dismiss under
Rule 12(b)(6) is to test the sufficiency of the allegations within the four corners of the
complaint and to that end, the Court is required to examine the allegations in the
plaintiff’s complaint and determine whether plaintiff has stated a claim for relief,
whether or not the non-moving party has filed an opposing memorandum of law.

In determining whether DDI has stated a claim, I take the facts pleaded in the
complaint as true and draw any inferences against SLS.17 If relief under those facts

pleaded factual allegations.).

18 Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008) (In ruling on a motion to dismiss
the judge must accept all allegations as true and may not dismiss on the basis that it appears
unlikely the allegations can be proven.).

19 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

20 See Navajo Nation v. Urban Outfitters, Inc., 935 F. Supp. 2d 1147, 1157 (D.N.M. 2013)
(Conversion is not required under Rule 12(d) when the court considers information that is
subject to proper judicial notice (e.g. facts that are a matter of public record such as pleadings
in a related case) or exhibits attached to the complaint); Tellabs, Inc. v. Makor Issues &
Rights, Ltd., 551 U.S. 308, 322 (2007).

21 Tal v. Hogan, 453 F.3d 1244, 1265 n. 24 (10th Cir. 2006) (exhibits attached to a complaint
are properly treated as part of the pleadings for purposes of ruling on a Rule 12(b)(6) motion
and courts may take judicial notice of facts which are a matter of public record).

is facially plausible, the complaint survives. A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw the reasonable inference
that the defendant is liable for the misconduct alleged. The question is whether the
complaint contains facts sufficient to support these claims, not whether DDI will
ultimately prevail on those claims.18 The plausibility standard is less than a
probability but more than a sheer possibility that DDI is entitled to the relief
requested.19 In addition, I may consider the exhibits or attachments to DDI’s
amended complaint without converting the motion to dismiss to one for summary
judgment under Fed. R. Civ. P. 12(d).20 Specifically, I can take judicial notice of
petitions, orders, journal entries, or other pleadings from the state court case which
were referenced in or attached to DDI’s amended complaint.21


 Because SLS has waived its right to attorney fees from DDI and its alleged
attorney fee lien, the second cause of action for determination of the validity of the

lien is moot; the Court focuses its analysis on DDI’s third cause of action – the
professional liability claim – asserted against SLS in the amended complaint.

DDI fails to state a claim against SLS based upon

the ripeness doctrine.


As DDI’s amended complaint states, the state court has previously entered an
order determining (1) that Hartford is not legally liable for DDI’s attorney fees in the
DDI/BCE/Hartford dispute; and (2) that BCE owes $378,662 in prevailing party
attorney fees to DDI, subject to a motion for reconsideration that BCE never filed.
The legal issue that surrounds whether Hartford is liable to pay a subcontractor’s
attorney fees awarded against BCE has been finally decided against DDI in state
court. That issue is precluded here. The amount of fees the state court determined
that BCE owes is precluded, too.

For DDI to recover against SLS on the professional liability claim, several
things have to occur. First, DDI has to prevail here on its claim that Hartford
breached the settlement agreement by challenging DDI’s right to recover attorney
fees from Hartford, or on its appeal of the state court’s determination that Hartford,
is not liable for the attorney fees under the partial settlement. Second, DDI has to
demonstrate that it did not recover the correct amount of fees from BCE and Hartford
as a result of SLS’s professional failings. Third, it must show that it has been
damaged by SLS’s failure to segregate to the extent of the fees it has been unable to
collect from BCE, apparently because that company is judgment-proof. These future
uncertainties implicate the ripeness doctrine and the Court’s power to hear and
consider the merits of this adversary proceeding.

The ripeness doctrine is a question of timing. It asks whether the challenged
harm has matured sufficiently to warrant judicial intervention.

22 In re Westby, 473 B.R. 392, 401 (Bankr. D. Kan. 2012), citing Tarrant Regional Water Dist.
v. Herrmann, 656 F.3d 1222 (10th Cir. 2011); Awad v. Ziriax, 670 F.3d 1111, 1124 (10th Cir.
2012) (Aim of ripeness doctrine is to prevent courts from entangling themselves in abstract
disagreements by avoiding premature adjudication, citing Abbott Labs. v. Gardner, 387 U.S.
136, 148 (1967), overruled on other grounds by Califano v. Sanders, 430 U.S. 99 (1977)).

23 Awad v. Ziriax, 670 F.3d at 1124.

24 Initiative and Referendum Inst. v. Walker, 450 F.3d 1082, 1097 (10th Cir. 2006).

25 Westby, supra.

26 In re Swanson, 343 B.R. 678, 680-81 (Bankr. D. Kan. 2006).

27 Awad v. Ziriax, supra.

DDI’s claim is not ripe for adjudication because it rests on future contingencies
that may never come to pass. Assuming without deciding that Hartford breached the
settlement agreement by opposing DDI’s right to fees under the payment bond, the
language of the attorney fee provision in the settlement agreement expressly
permitted Hartford and BCE to challenge the amount of the attorney fees “based on

the Subcontract and Kansas law.” The state court recognized that the statutory
language of KAN. STAT. ANN. § 60-1111(a) and courts considering similar bond claims
hold that such public works payment bonds generally do not cover prevailing party
attorney fees.

28 Adv. Dkt. 17-3, p. 11, citing Blinne Contracting Co. v. Bobby Goins Enterprises, Inc., 715
F. Supp. 1044, 1046 (D. Kan. 1989), aff’d 1 F.3d 1249 (10th Cir. 1993). The district court in
Blinne held that only the value of goods and services used or expended in the construction
of a public improvement are recoverable under § 60-1111; lost profits or damages incurred
from a contract breach are not recoverable against the bond. 715 F. Supp. at 1046. Such
public works bonds are viewed as substitutes for mechanic’s liens and do not broaden the
class of those protected. Wichita Sheet Metal Supply, Inc. v. Dahlstrom and Ferrell Const.
Co., Inc., 246 Kan. 557, 562, 792 P.2d 1043 (1990). See also Hope’s Architectural Products,
Inc. v. Lundy’s Const., Inc., 762 F. Supp. 1430, 1434 (D. Kan. 1991); Dun-Par Engineered
Form Co. v. Vanum Const. Co., Inc., 49 Kan. App. 2d 347, 352, 310 P.3d 1072 (2013)
(Obligation of surety bond is to be measured by the bond itself and may not be extended by
implication or enlarged by construction beyond the terms of the executed bond); U.S. ex rel.
C.J.C., Inc. v. Western States Mechanical Contractors, Inc., 834 F.2d 1533, 1542-32 (10th
Cir. 1987) (Miller Act case; government subcontractor who prevailed against contractor on
quantum meruit theory not entitled to recover prevailing party attorneys’ fees under Miller
Act absent a provision in the contract or payment bond or establishing an exception to the
American Rule that each party bears its own fees); F.D. Rich Co. v. United States ex rel.
Industrial Lumber Co., 417 U.S. 116, 126-31 (1974) (Successful plaintiff in Miller Act case
not entitled to recover attorneys’ fees);

29 28 U.S.C. § 1738.

Embedded in the third cause of action, DDI also claims that it is entitled to
disgorgement of all fees it paid SLS up to the $378,662 it has been unable to collect

from BCE and that this also issues from SLS’s failure to segregate its billings.

30 Adv. Dkt. 17, ¶ 49.

31 A disgorgement award is an equitable remedy flowing from unjust enrichment and serves
as restitution for benefits wrongfully obtained. In the contractual context, a contracting
party’s deliberate or conscious breach of contract that results in profits to the breaching
party may give rise to a claim for restitution for the profit realized from the intentional
breach if a damage award does not adequately compensate the non-breaching party. It is an
alternative to a remedy in contract damages that is rarely available. See RESTATEMENT
Johnson & Bergman, Chtd v. Oliver, 289 Kan. 891, 220 P.3d 333 (2009) (recognizing
disgorgement of fees as a proper remedy for attorney fees that were wrongfully received); In
re Kinderknecht, 470 B.R. 149 (Bankr. D. Kan. 2012) (disgorgement of fees may be ordered
if the attorney fees charged and collected were unreasonable).


Having determined that DDI’s third cause of action is not ripe for adjudication,
it fails to state a plausible claim against SLS and this court lacks subject matter
jurisdiction; SLS’s motion is GRANTED and the third claim for relief under the
amended complaint is DISMISSED without prejudice. The second claim for relief
against SLS is also DISMISSED as MOOT due to the fact that SLS’s answer to the

original complaint “waives, disclaims, and releases” any claim or lien it has against
DDI for outstanding attorneys’ fees.

32 Adv. Dkt. 11.

# # #

14-05068 Williams v. M. Bruenger & Co., Inc. (Doc. # 26)

Williams v. M. Bruenger & Co., Inc., 14-05068 (Bankr. D. Kan. Jun. 25, 2015) Doc. # 26

PDFClick here for the pdf document.

SIGNED this 25th day of June, 2015.




LAURA B. BRANNAN, ) Case No. 13-12834
) Chapter 13

Debtor. )

Chapter 13 Trustee, )
Plaintiff, )
vs. ) Adv. No. 14-5068

Defendant. )


Is the chapter 13 Trustee barred from avoiding a secured creditor’s liens post-

confirmation when she did not object to confirmation? Does it matter whether the

Case 14-05068 Doc# 26 Filed 06/25/15 Page 1 of 17

Trustee signed an Agreed Order providing for the creditor’s claims to be treated as
secured or that she did so before the claims bar date and didn’t have an opportunity
to see, far less object to, the creditor’s claim before confirmation? And if the orders
bar her efforts, does § 502(j) reconsideration of the claims leave the trustee another
source of relief?

Section 1327(a) binds the debtor and each creditor to a confirmed plan’s
provisions whether the plan treats the claim or not and whether the creditor objects,
accepts, or rejects it.1 Section 502(j) provides for the reconsideration of a claim that
has been allowed or disallowed, upon a showing of cause and based upon the equities
of the case.2 Even though the plan was confirmed before the claims bar date, the
Trustee signed an agreed order providing for the secured creditor’s treatment and
recommended that the debtor’s plan be confirmed. That treatment binds her under §
1327(a) and effectively bars the Trustee’s adversary proceeding to avoid the creditor’s
lien under § 544(b).3 Even § 502(j) does not save the Trustee because she did not show
cause why the secured creditor’s claims should be reconsidered.

Finally, even if confirmation did not bar the complaint or if she had
demonstrated cause to reconsider, her cause of action fails on the merits. Although
the debtor did not execute a form security agreement that contained words of grant,
reading all of the documents between the debtor and the creditor as a composite

1 11 U.S.C. § 1327(a).
2 11 U.S.C. § 502(j).
3 11 U.S.C. § 544(b).

Case 14-05068 Doc# 26 Filed 06/25/15 Page 2 of 17

transaction makes it clear that the parties intended that the creditor would sell the
debtor the trucks while retaining a purchase money security interest in them. The
creditor’s liens attached to the collateral under KAN. STAT. ANN. § 84-9-203 (2014

Supp.). 4


This adversary proceeding is a core proceeding over which the Court may
exercise subject matter jurisdiction under 28 U.S.C. § 1334 and § 157(a) and (b)(1).5


The debtor Laura Brannan is an over-the-road trucker who was formerly
employed by M. Bruenger & Co. (MBC), a Wichita trucking concern. For a long time,
MBC has made a practice of locating and selling semi-tractors (trucks) to its drivers.
The drivers purchase the trucks and drive loads provided by MBC. MBC deducts the
drivers’ weekly installment payment from their pay or fees and purportedly retains
a security interest in the trucks until the sale price is paid in full. The idea is to
incentivize the drivers by giving them ownership of their unit while making them
independent contractors of MBC as opposed to its employees. MBC sold two semi-
tractors to Ms. Brannan utilizing this financing program.

In Ms. Brannan’s case, MBC documented its two transactions by the parties

4 The plaintiff chapter 13 trustee Laurie B. Williams appears by her attorney Karin
Amyx. The defendant M. Bruenger & Co., Inc. appears by its attorney Eric W.
5 See 28 U.S.C. § 157(b)(2)(A), (K) and (O).

Case 14-05068 Doc# 26 Filed 06/25/15 Page 3 of 17

executing a series of documents, beginning with a Weekly Installment Agreement.6
That agreement described the truck being sold, the purchase price, the date of sale,
and the weekly installment payment. Both Brannan and a representative of MBC
signed it. MBC then made a Bill of Sale over to the buyer, again describing the truck
by vehicle identification number, make, and year, and showing the purchase price.7
MBC next assigned to the buyer its certificate of title for the truck, its representative
executing the assignment section on the title’s reverse side, assigning the truck and
title to Brannan.8 In this assignment section, Brannan checked a box indicating that
the truck is subject to MBC’s lien and signed a statement affirming that lien as the
title form requires. As the new owner of the truck, Brannan then obtained a Title and
Registration Receipt from the Kansas Division of Vehicles indicating MBC’s liens on
the trucks.9 MBC followed this process for both of the trucks Brannan purchased -- a
2007 Kenworth purchased in October of 2012 and a 2009 Cascadia Freightliner
purchased two months later in December.

Ms. Brannan filed her chapter 13 case on November 1, 2013.10 The nongovernmental
creditor bar date was set for March 4, 2014. She filed an amended
chapter 13 plan in December in which she proposed to make 60 monthly payments of

6 Ex. A, p. 4 (Kenworth); Ex. E, p. 4 (Freightliner).
7 Ex. B (Kenworth); Ex. F (Freightliner).
8 Ex. C (Kenworth); Ex. G (Freightliner).
9 Ex. A, p. 8; Ex. E, p.8; Ex. D, H, and Q.
10 Brannan scheduled MBC as a secured creditor on her bankruptcy schedules and
identified the trucks as the security. See No. 13-12834, Dkt. 12, Schedule D.

Case 14-05068 Doc# 26 Filed 06/25/15 Page 4 of 17

$1,437.00.11 Because she had purchased the trucks within a year of filing, her plan
provided for treating MBC under the two truck purchase agreements as “one year
loan creditors” under § 1325(a)(5)’s hanging paragraph.12 She proposed minimum
monthly payments on both trucks and to pay them in full. On December 27, the
trustee objected to Brannan’s plan for several reasons, but did not question whether
MBC’s claims were secured claims.13 On January 2, 2014, MBC objected to
confirmation, too, noting that the plan did not provide for a third truck, but
specifically not objecting to the proposed treatment of the two trucks described


On February 3, the parties presented an Agreed Order that resolved MBC’s
confirmation objection by providing for the surrender of the unmentioned truck and
setting forth an agreement about the values and payment terms concerning the two
trucks Brannan sought to retain.15 The Trustee approved this Agreed Order along
with counsel for debtor and MBC. The Agreed Order specifies that “Bruenger shall
have a general secured claim” as to both vehicle transactions, that “it shall be allowed
a general unsecured claim for any deficiency balance,” and that “Bruenger shall
retain its liens with respect to its secured claims….”16 The amended plan was

11 No. 13-12834, Dkt. 26.
12 11 U.S.C. § 1325(a)(5). The hanging paragraph is an unnumbered paragraph that
immediately follows § 1325(a)(9) but refers to treatment of certain allowed secured
claims provided for by the plan under § 1325(a)(5).
13 No. 13-12834, Dkt. 33.
14 No. 13-12834, Dkt. 34.
15 No. 13-12834, Dkt. 43.
16 Id. at ¶ 6.

Case 14-05068 Doc# 26 Filed 06/25/15 Page 5 of 17

confirmed and a confirmation order entered on February 19.17 MBC filed its proofs of
claim on March 4, 2014.18 After the Trustee reviewed the proofs of claim, she filed
this adversary proceeding under § 544 to avoid and preserve what she alleges to be
an unattached security interest in each of the trucks. The parties provided pre- and
post-trial briefs and the Court held a trial on March 17, 2015.


The Trustee claims that MBC’s purported security interests in the two trucks
never attached because Laura Brannan never “authenticated” a security agreement
as is required by KAN. STAT. ANN. § 84-9-203(b), Kansas’ version of revised Article 9
of the Uniform Commercial Code. MBC responds that while no form security
agreement was made, a reading of all the transaction documents makes clear that
the parties intended to and did create security interests that attached to the
Freightliner and Kenworth to secure MBC’s claims. But MBC also claims that the
Trustee’s execution of the Agreed Order resolving MBC’s objection to confirmation
and the Confirmation Order itself bar the Trustee’s lien avoidance action.

Section 1327(a) Finality

Section 1327(a) provides that confirmation of the debtors plan is binding on
the debtor and every creditor (whose interests the Trustee represents) whether or not
the plan treats their claims or they have objected to or accepted the plan.19 In this

17 No. 13-12834, Dkt. 49.
18 See Proof of Claim Nos. 18 and 19.
19 11 U.S.C. § 1327(a). See In re Talbot, 124 F.3d 1201 (10th Cir. 1997) (res judicata
effect of § 1327(a) barred IRS from extracting payments for penalties and interest

Case 14-05068 Doc# 26 Filed 06/25/15 Page 6 of 17

case, the confirmed plan plainly provides that MBC’s claims are secured by the trucks
and for those claims to be paid as specified in the Agreed Order. MBC argues that §
1327(a) effectively codifies the doctrine of res judicata as to the allowance and
treatment of claims once a plan is confirmed and that, as the United States Supreme
Court has held in Espinosa, parties to a plan are stuck with its contents once it’s
confirmed, even if the applicable plan provisions are contrary to bankruptcy or other
law.20 The Trustee responds that § 502(j) carves out an exception to § 1327(a)’s
preclusive effect by permitting her to seek reconsideration of MBC’s allowed claims
for cause.

The Trustee notes that her approval of the Agreed Order and confirmation
recommendation both occurred before MBC filed its proofs of claim. She says that
without the proofs of claim being filed, there wasn’t any way for her to know that
MBC’s liens were flawed and that she signed the Agreed Order because this Judge
requires that she be made privy to and sign off on all orders in chapter 13 cases that
affect her duties.21 She also argues that when plans are confirmed in this District,
confirmation does not finally allow or disallow claims and that any claim treated in

not provided for under confirmed plan in exchange for release of lien on residence
debtors sought to sell); In re Mersmann, 505 F.3d 1033, 1047 (10th Cir. 2007)
(binding effect of confirmed chapter 13 plan serves the same purpose as the general
doctrine of res judicata), abrogated on other grounds by United Student Aid Funds,
Inc. v. Espinosa, 559 U.S. 260 (2010).
20 United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 276 (2010).
21 This requirement insures that debtors and creditors do not enter into agreements
that affect the Trustee’s administrative duties without her knowledge.

Case 14-05068 Doc# 26 Filed 06/25/15 Page 7 of 17

the plan can be disallowed even after confirmation.22

The courts are somewhat divided on whether confirmed plans preclude
revisiting the validity of liens or claims. Some hold that they do not. In In re Johnson,
when the trustee objected to a creditor’s secured claim after plan confirmation, that
creditor raised § 1327(a) as a bar to the objection.23 Noting that the district’s form
plan neither allows nor disallows claims, and that meaningful claim review by the
trustee is impossible in a district where plans are routinely confirmed on the date of
the debtor’s first meeting of creditors, well before the claims bar date, the court
sustained the trustee’s claim objection. The court explained that the plan in question
is a “pot” plan, meaning that the debtor is obligated for a series of fixed payments
that will fund a liquidated amount to be distributed to the creditors treated in the
plan. Implicit in that sort of plan is the idea that if the trustee successfully objects to
a claim (or avoids a secured creditor’s lien), part or all of that pot will be distributed
differently. In other words, what § 1327(a) makes “final” about a confirmation order
is not what a particular creditor will get, but what the debtor will pay.24 According to
the Johnson court, holding otherwise would greatly damage the speedy confirmation
process by slowing it down while the trustee examined claims before recommending

Other courts conclude that the entry of a confirmation order precludes any

22 The trustee cites 11 U.S.C. § 502(j) which provides for reconsideration of an
allowed or disallowed claim for cause according to the equities of the case.
23 In re Johnson, 279 B.R. 218 (Bankr. M.D. Tenn. 2002).
24 Id. at 221-22.

Case 14-05068 Doc# 26 Filed 06/25/15 Page 8 of 17

issue that is fundamental to the order. In In re Reid,25 a chapter 13 trustee sought to
avoid a mortgage on the debtor’s home after the debtor’s plan was confirmed. The
plan specifically called for the debtor to cure and maintain mortgage payments and
for the creditor to retain its lien. Only then did the trustee file an adversary
proceeding to avoid the mortgage. The court began with the familiar rule that an
issue is precluded if it has been resolved by a final judgment on the merits in an
action involving the identical parties that considered the same or similar cause of
action. In Reid, the court concluded that the chapter 13 confirmation order was a final
order on the merits, that both the trustee and the creditor were parties to the
confirmation process that generated the order, and that the plan had addressed the
creditor’s claim. All three of the components of res judicata were thus met. The court
further noted that even though the trustee is not specifically named in § 1327(a), “it
is difficult to imagine how the plan can be final if it is not final as to [the trustee].”26
The Reid opinion cites a number of cases that have so held.

The Eleventh Circuit has also held that confirmation orders are final and
preclude actions like the one here. In Hope v. Acorn Financial, Inc., a chapter 13
trustee (who, unlike the trustee here, was fully aware of a defect in the secured
creditor’s lien) failed to object to confirmation of the debtor’s plan, but then sought to
avoid the lien as does the trustee here.27 The trustee argued that the absence of a

25 Bankowski v. Wells Fargo Bank, N.A. (In re Reid), 480 B.R. 436 (Bankr. D. Mass.
26 Id. at 445, n. 9 (citing cases) and 446.
27 731 F.3d 1189 (6th Cir. 2013).

Case 14-05068 Doc# 26 Filed 06/25/15 Page 9 of 17

reference to the trustee in § 1327(a) meant that the trustee was not bound by the
confirmation order as the debtor and particular creditors are. The panel reasoned
that § 1327(a) must be read along with other parts of chapter 13 like § 1325(a)(2) and

(c) that require the trustee to make distributions under the confirmed plan and §
1329(a) which authorizes the trustee to request post-confirmation modification of a
plan. Quoting the Reid court, the panel stated, “These provisions would be
‘unnecessary if the confirmed plan did not already bind the trustee as it does the
debtor.’”28 Moreover, the panel noted, the role of the trustee is to serve the interests
of the creditors as a body.29 Consequently, the trustee would be bound by provisions
that bind the creditors. The panel also noted that its decision should be limited to its
facts and particularly to the fact that the trustee knew of the lien’s flaw, but
apparently did not act on that knowledge before confirmation.
The Trustee’s complaint here is not based on information that was unavailable
to her before confirmation. As the Trustee affirmatively consented to the debtor’s and
creditor’s proposed treatment of the claim as secured and then recommended the
amended plan be confirmed, it is hard to understand how she should not be bound by
that consent. While it may not be reasonable to expect the trustee to conduct
discovery as to every secured claim, it is equally untenable to expose the debtor and
secured creditors to the possibility of having to defend their secured status even after

28 Id. at 1193.
29 Id., citing Overbaugh v. Household Bank, N.A. (In re Overbaugh), 559 F.3d 125,
129-30 (2nd Cir. 2009).

Case 14-05068 Doc# 26 Filed 06/25/15 Page 10 of 17

the trustee has consented to its treatment as a secured claim. That would seriously

undermine the creditors’ confidence that the resolution they have reached, and that

the court has blessed, will be final and enforceable. As one bankruptcy court noted in

addressing a post-confirmation challenge to the validity of a secured claim:

. . . had the Trustee believed that the Mortgage was avoidable, he
would not have recommended confirmation of a plan calling for
payment of a one-percent dividend to general unsecured creditors. . .
. When reviewing plans for confirmation, the standing Chapter 13trustee is charged with calculating the value of the non-exempt assets
and disposable income available in the estate for payment, over time,
to unsecured creditors.30

Here, the Trustee went one step further when she approved the Agreed Order. The

secured status of MBC was an issue intrinsic to the plan as confirmed. The Trustee’s

action to avoid that status is barred by the res judicata effect of § 1327(a).

Reconsideration of Allowed Claims, § 502(j)

The Trustee’s fallback argument is that § 502(j) authorizes the Court to

reconsider an allowed claim for cause even after confirmation.31 The first question is

30 In re Crum, 479 B.R. 734, 743 (Bankr. S.D. Ohio 2012) (applying § 1327 and the
doctrine of judicial estoppel to bar the chapter 13 trustee’s post-confirmation
avoidance complaint based upon a discoverable defect in the creditor’s mortgage;
facts bearing on extent of creditor’s lien were available prior to confirmation). See
also Celli v. First Nat’l Bank of N. New York (In re Layo), 460 F.3d 289, 295 (2d Cir.
2006) (the trustee has both a motive and opportunity to confirm the status of real
estate liens affecting the debtor’s estate at or before confirmation of the plan.).
31 See In re Willoughby, 324 B.R. 66 (Bankr. S.D. Ind. 2005) (Till decision handed
down after confirmation of plan constituted cause for reconsidering cram downinterest component of creditor’s claim; fact that plan had been confirmed did not
preclude reconsideration of claim.); Amtech Lighting Services Co. v. Payless
Cashways (In re Payless Cashways, Inc.), 230 B.R. 120, 137 (8th Cir. BAP 1999)
(reconsideration can be requested at any time, even after expiration of the time to

Case 14-05068 Doc# 26 Filed 06/25/15 Page 11 of 17

whether the Agreed Order and the Confirmation Order operated to allow MBC’s claim

as secured. Some courts hold that claims are deemed allowed by a confirmation order

that is entered without objection.32

If the Agreed Order and Confirmation Order sufficed to allow MBC’s claims,

the Trustee could still seek their reconsideration for cause. Another judge in this

District has held that the classification of a secured claim may be reconsidered post-

confirmation when the creditor’s collateral is destroyed.33 Most reconsideration cases

involve an unexpected post-confirmation change in circumstances, fraud, or newly

discovered evidence as the “cause” for reconsideration.34 There is nothing the Trustee

knows now that was unascertainable or concealed by the creditor beforehand. Nor is

there a suggestion of misconduct on MBC’s part. The Trustee has shown no “cause”

appeal); In re Gomez, 250 B.R. 397 (Bankr. M.D. Fla. 1999) (confirmation of plan
does not preclude reconsideration of claim); Matter of Zieg, 206 B.R. 974 (D. Neb.
1997) (confirmed plan is not res judicata as to a motion for reconsideration).
32 See In re Gomez, 250 B.R. 397, 401; In re Bernard, 189 B.R. 1017, 1021, n. 4
(Bankr. N.D. Ga. 1996)(the “implicit decision of allowance took place at
33 See In re Lane, 374 B.R. 830 (Bankr. D. Kan. 2007) (post-confirmation destruction
of car securing creditor’s 910 claim; reclassified creditor’s deficiency claim as
general unsecured claim)
34 See In re Mellors, 372 B.R. 763 (Bankr. W.D. Pa. 2007) (post-confirmation change
of circumstances); In re East Hill Mfg. Corp., 214 B.R. 536 (Bankr. D. Vt. 1997) (no
cause shown were information regarding allowed claim was available to debtor
when its objection to claim was heard); In re Arden Properties, Inc., 248 B.R. 164
(Bankr. D. Ariz. 2000) (denying reconsideration where information was not newly
discovered evidence); In re Farley, Inc., 211 B.R. 889 (Bankr. N.D. Ill. 1997)
(previously discoverable and available evidence may not be considered in context of
motion to reconsider); International Yacht and Tennis, Inc., 922 F.2d 659 (11th Cir.
1991) (fraud). See also 4 Collier on Bankruptcy, § 502.11[5] (16th ed.) (newly-
discovered evidence after allowance of claim should be cause for reconsideration).

Case 14-05068 Doc# 26 Filed 06/25/15 Page 12 of 17

to reconsider MBC’s claims.35

Composite Documentation Constitutes an Authenticated

Security Agreement and Attachment of Lien

Even if there were reason to reconsider MBC’s secured claims, the “equities”

do not support the Trustee’s assertion that MBC’s documents failed to create

enforceable security interests in the trucks because the law of secured transactions

35 In addition, several courts have held that post-confirmation reconsideration of a
claim may not be used to reclassify a creditor’s claim from secured to unsecured
which is essentially what the Trustee is after here. See e.g. Celli v. First Nat’l Bank
of N. New York (In re Layo), 460 F.3d 289 (2d Cir. 2006) (confirmation order was resjudicata where trustee attempted to avoid lien following confirmation; can’t
reclassify secured claims post-confirmation);Wallis v. Justice Oaks II, Ltd. (In re
Justice Oaks, II, Ltd.), 898 F.2d 1544, 1553 (11th Cir. 1990), cert. denied, 498 U.S.
959 (1990) (an objection that challenges the classification of a claim must be madebefore confirmation of the chapter 13 plan or it will be deemed allowed by the
confirmation order); In re Beam, 510 B.R. 399 (Bankr. N.D. Ga. 2014) (debtors werebarred by confirmed plan from reclassifying secured claim to strip off creditor’s
lien); In re Crum, 479 B.R. 734 (Bankr. S.D. Ohio 2012) (chapter 13 trustee whom
recommended confirmation of plan was precluded by res judicata effect of
confirmation order from seeking to avoid lender’s mortgage lien; allowing trustee to
belated challenge secured claim would result in unfair detriment to mortgagelender); In re Berrouet, 469 B.R. 393 (Bankr. N.D. Ga. 2012) (confirmation orderwas res judicata on classification and treatment of claims provided in plan and as toissues that were or could have been brought prior to confirmation); In re Rutt, 457

B.R. 97 (Bankr. D. Colo. 2010) (confirmed plan is res judicata to all issues that wereor could have been brought prior to confirmation); In re Wilson, 409 B.R. 72 (Bankr.
W.D. Pa. 2009) (chapter 13 debtors not entitled to reconsideration of order allowingpurchase money vehicle lender’s claim as fully secured where plan treated as fullysecured and debtors did not indicate any intent to challenge value of vehicle and
strip down lien); In re Coffman, 271 B.R. 492 (Bankr. N.D. Tex. 2002)
(reconsideration of claim cannot be used to reclassify claim; debtors bound by
confirmed plan); In re Clark, 172 B.R. 701 (Bankr. S.D. Ga. 1994) (doctrine of resjudicata precluded debtor’s objection to treatment of creditor’s claim as secured;
proof of secured claim must be allowed or disallowed before plan confirmation or the
claim must be deemed allowed for purposes of the plan).
Case 14-05068 Doc# 26 Filed 06/25/15 Page 13 of 17

makes clear that they do.36 Many courts have read composite agreements like the
ones in this case to create enforceable security interests even in the absence of “magic
words” of grant because the agreements’ provisions manifested the parties’ intent to
create security interests in the collateral. A reading of the documents in pari materia
makes that clear here. Though the Weekly Payment Agreement lacks words of grant,
it shows that the parties intended to enter into a sale agreement. So does the Bill of
Sale. While those agreements lack references to the creation or retention of security
interests in the trucks, others do not. First, Ms. Brannan signed and acknowledged
on the reverse side of the titles (assignment of title) that she was the buyer of the
trucks and that they each were subject to MBC’s lien.37 Second, she signed an
application for title indicating that MBC was a “1st Lienholder.”38 Finally, MBC is
identified on the Title and Registration Receipts as a lienholder on the trucks.39 The
sum of these documents, taken with Mr. Bruenger’s credible testimony as to the
custom and usages of MBC as to this long-standing financing program satisfy the

36 Even if the Trustee were able to show “cause,” she must also demonstrate that
the equities of the case warrant disallowance of MBC’s secured claims. See Fed. R.
Bankr. P. 3008 and § 502(j); Municipality of Carolina v. Gonzalez (In re Gonzalez),
490 B.R. 642, 651 (1st Cir. BAP 2013) (There is no basis to reconsider an order
disallowing a claim according to the equities of the case without cause); In re
Rayborn, 307 B.R. 710, 720 (Bankr. S.D. Ala. 2002) (reconsideration is a two-stepprocess: first, cause must be shown and second, the court must decide whether the
equities dictate allowance or disallowance of the claim).
37 Ex. C (Kenworth), Ex. G (Freightliner). On both titles, Brannan “swear[s] oraffirms[s] that all liens . . . are listed” and acknowledges “severe penalties formaking false statements under oath.”
38 Ex. D (Kenworth); Ex. H (Freightliner).
39 Ex. A (Proof of Claim 19), p. 8; Ex. E (Proof of claim 18), p. 8.

Case 14-05068 Doc# 26 Filed 06/25/15 Page 14 of 17

Court that Brannan granted MBC purchase money security interests in the

Freightliner and the Kenworth.

KAN. STAT. ANN. § 84-9-203 requires that a debtor “authenticate” a security

agreement in order to create a security interest, but no particular form of a security

agreement is required. Instead the agreement must create a security interest as

defined in § 84-1-201(b)(35).40 Indeed a “collage” or “composite” group of documents

may stand as evidence of such an agreement.41 Kansas contract law recognizes the

collage or composite document theory.42 As one treatise on secured transactions has

noted, requiring formal words of grant “smack[s] of the antiquated formalism the

40 KAN. STAT. ANN. § 84-9-102(a)(73) (2014 Supp.) (defining a “security agreement”);
§ 84-1-201(b)(35) (2014 Supp.) (defining “security interest” as an interest inpersonal property or fixtures which secures payment or performance of an
obligation). See also City of Arkansas City v. Anderson, 242 Kan. 875, 883-86, 752
P.2d 673 (1988) (assignment created a security interest); Wellsville Bank v. Nicolay,
7 Kan. App. 2d 172, 178, 638 P.2d 975 (1982) (Assignment was valid security
agreement where it satisfied statutory requirements of providing for a security
interest, identified the collateral, and bore debtor’s signature.).
41 1 Barkley Clark and Barbara Clark, THE LAW OF SECURED TRANSACTIONS UNDER
THE UNIFORM COMMERCIAL CODE, §2.02[1][d] (3d ed. 2015) (hereafter “Clark”).
42 See City of Arkansas City, supra at 883-84 (all documents associated with
assignment would be read together to ascertain the true meaning of the assignment
and intent of the parties to the assignment to determine whether it created a
security interest); Hall v. Mullen, 234 Kan. 1031, 1038, 678 P.2d 169 (1984) (two ormore instruments executed by same parties as part of same transaction and subject
matter will be read together to determine parties’ intent); In re Cunningham, 489

B.R. 602 (Bankr. D. Kan. 2013) (considering credit application, cardholderagreement, and several sales receipts under composite document theory but
concluding documentation was “facially insufficient” to create security interest in
consumer goods purchased by debtors for lack of a sufficient description of theconsumer goods in the credit application and lack of debtors’ signature and securityinterest on the sales receipts).

Case 14-05068 Doc# 26 Filed 06/25/15 Page 15 of 17

drafters [of Article Nine] were trying to avoid.”43 In this case, these documents, when
read together, unequivocally “contemplate[ ] objective indicia of the possibility of an
underlying actual agreement,” thus serving the purposes of a security agreement.44
They suggest the parties’ mutual intention to create or retain a lien and they describe
that which is encumbered. If Brannan didn’t intend to confer a lien, why did she sign
and check the lien box on the assignment of title? And why did she designate MBC
as a lienholder when she applied for a title? The documents here indicate at least the
“possibility of an underlying agreement” if not much more.45


The Trustee’s lien avoidance complaint is barred by the res judicata effect of
the Agreed Order on MBC’s claims and the confirmed chapter 13 plan under §
1327(a). She did not demonstrate sufficient cause to reconsider MBC’s secured claims
under § 502(j). And, if she had, her challenge to MBC’s secured status would be denied
on the merits under the composite document theory because the sale and title

43 Clark, §2.02[1][c] at 2-21.
44 4 White & Summers, UNIFORM COMMERCIAL CODE, § 31-3 (6th ed. 2010).
45 See In re Giaimo, 440 B.R. 761 (6th Cir. B.A.P. 2010) (considered together,
application for certificate of title and certificate of title, constituted securityagreement); In re Jacobs, 2006 WL 4451566 (Bankr. D. Idaho Feb. 10, 2006)
(debtors’ application for certificate of title for car coupled with contemporaneous
seller’s invoice constituted a valid security agreement; application identified thecollateral, instructed the state to issue a title showing seller as a lienholder, andwas signed by debtor); Roan v. Murray, 556 N.W.2d 893, 895-96 (Mich. Ct. App.
1996) (debtor’s application for a certificate of title, standing alone, was sufficient to
create a security agreement); Baystate Drywall, Inc. v. Chicopee Sav. Bank, 385
Mass 17, 429 N.E.2d 1138, 1142 (1982) (application for transfer of title listing
lienholder meets writing requirement for security interest to attach).

Case 14-05068 Doc# 26 Filed 06/25/15 Page 16 of 17

documentation for both truck transactions amount to authenticated security
agreements that granted MBC enforceable security interests. Its liens attached to the
trucks under KAN. STAT. ANN. § 84-9-203.

Judgment shall be entered in favor of MBC on the Trustee’s adversary
complaint. A Judgment on Decision will issue this day.
# # #

Case 14-05068 Doc# 26 Filed 06/25/15 Page 17 of 17

11-11291 Rice (Doc. # 524)

In Re Rice, 11-11291 (Bankr. D. Kan. Apr. 2, 2015) Doc. # 524

PDFClick here for the pdf document.

SIGNED this 2nd day of April, 2015.




IN RE: )
FREDERICK DEAN RICE, II ) Case No. 11-11291
) Chapter 11
Debtor. )



A creditor is bound by the terms of a confirmed chapter 11 plan whether it
objects to the plan or not. Property dealt with by the plan is, except as provided in
the plan, free and clear of all creditors’ claims and interests, unless those debts are
not dischargeable. In Kansas, unpaid ad valorem tax on real property is due and
payable on the first day of November and a lien for the tax attaches on that date. The
lien continues until all of the tax, and any interest and penalties, has been paid in


Case 11-11291 Doc# 524 Filed 04/02/15 Page 1 of 8

full. Ad valorem property tax claims are excepted from discharge only to the extent
they are accorded a priority under § 507(a)(8)(B) and that subsection limits priority
to only those taxes that could last be paid without penalty within one year of filing.

In this case, the debtor’s plan provided that certain of his rental real estate
would be sold and, because the rentals were in such distressed condition, the tax
claims against them would be allowed in one-half of the county’s valuation of the
various tracts and paid upon the sale of the tracts. Sedgwick County received notice
of the plan, but did not object to its confirmation. Now that the plan has been
confirmed, the County objects to the debtor’s motion to sell the tracts and pay its
claim as the plan provides.1 But, because the County did not object to the plan, it is
bound by its terms. The reorganized debtor received the property free and clear of the
County’s claims, except as the plan provided. Sedgwick County’s sale objection must
be overruled.2


This is a core proceeding over which the Court may exercise subject matter


Frederick Rice filed a chapter 13 case on May 3, 2011; the case was
subsequently converted to chapter 11. Mr. Rice has suffered from mental illness for

1 Dkt. 475 (Sale No. 3 Motion), 482 (Sedgwick County’s Objection).
2 The debtor/guardian ad litem (GAL) Calvin Wiebe appears by counsel W. Thomas
Gilman. Creditor Sedgwick County appears by Sedgwick County Counselor Patricia

J. Parker.
3 28 U.S.C. §§ 157(b)(1) and (b)(2)(A), (N), (O); 28 U.S.C. § 1334.

Case 11-11291 Doc# 524 Filed 04/02/15 Page 2 of 8

a number of years. Early on, the Court appointed Calvin L. Wiebe as guardian ad
litem (GAL) to protect Mr. Rice’s interests in this case.4

Mr. Rice’s chapter 11 plan provided that his assets would be liquidated and his
claims paid down so that income on the remaining assets could amortize the
remaining debt and pay Mr. Rice’s living expenses.5 That plan was properly noticed
to the creditors and confirmed on July 23, 2014.6 Sedgwick County, whose rights were
altered by the plan, but who failed to object to its confirmation, now objects to the
debtor’s motion to sell real property free and clear of its ad valorem tax liens as the
plan provided.7 Because the order confirming the debtor’s plan is final, Sedgwick
County is bound by its terms and its objection to the sale must be overruled.

One of Mr. Rice’s businesses involved buying and renting houses, sometimes
with conventional financing and sometimes on contracts for deed. When Rice’s health
worsened, he lost the ability to keep track of these houses and many suffered from
substantial deferred maintenance. He also let the ad valorem taxes on these
properties lapse. In the plan, the GAL contended that Sedgwick County had
significantly overvalued some of the properties and that a substantial portion of the
taxes owed to the County were unsecured. The GAL proposed to sell these properties

4 See Fed. R. Bankr. P. 1004.1; Dkt. 67.
5 Dkt. 405.
6 See Dkt. 409 (September 9, 2013 certificate of service of plan, disclosure statement,
ballot, and notice to creditors, on Sedgwick County); Dkt. 463.
7 See 11 U.S.C. § 363; Dkt. 475 (Motion for Sale No. 3); Dkt. 482 (Sedgwick County’s


Case 11-11291 Doc# 524 Filed 04/02/15 Page 3 of 8

free and clear of any liens and to allow the County’s secured claims at one-half of the

total of taxes, interest, and penalties due on each tract.8

Part V of the Plan clearly articulates what the GAL intended to do in

connection with overvalued properties with large tax claims. He stated that he would

continue to offer these properties for sale under § 363 and allow Sedgwick County’s

claims at one-half of the outstanding taxes due—

To the Sedgwick County Treasurer for one-half of the outstanding ad
valorem taxes due on the Unproductive Real Estate as each parcel of
the Unproductive Real Estate is sold. Sedgwick County will accept
one-half of the ad valorem taxes in full satisfaction of its claim to such taxes
on each parcel of the Unproductive Real Estate as those parcels are sold.
Sedgwick County has been accruing ad valorem taxes on the parcels ofUnproductive Real Estate using values (based on the deteriorated conditionof the Unproductive Real Estate) that are significantly overstated.9

The reduced taxes were to be paid second after direct costs of sale. This plan

was filed on September 3, 2013 and the disclosure statement approved.10 The GAL

balloted the plan and, on July 23, 2014, it was confirmed.11 The County did not object

to confirmation nor did it file a rejecting ballot. The County did file a proof of claim

on June 27, 2011.12 Now the GAL seeks to sell these overvalued properties as the plan

contemplated and the County has objected to the sale motion, arguing that the

8 See Dkt. 405, §§ 5.1-5.3, pp. 15-17.
9 Dkt. 405, pp. 15-16.
10 Dkt. 458 (Order approving Disclosure Statement). See also, Dkt. 423 (Courtroom
minute sheet from hearing October 10, 2013).
11 Dkt. 463. See also, Dkt. 448 (Courtroom minute sheet from confirmation hearing
held March 18, 2014).
12 See Claim No. 5 – claim for real estate taxes in amount of $21,804 for tax years
2006-2010 on various properties; the County designated the claim as secured and as
an unsecured priority claim but did not state what portion of the claim was entitled
to priority.


Case 11-11291 Doc# 524 Filed 04/02/15 Page 4 of 8

debtor’s obligation to pay these taxes is excepted from his discharge and that the tax
claims cannot be allowed as the plan suggests.13 At a preliminary hearing on this
motion to sell, the Court directed that the sales go forward, but that funds remaining
after payment of the sale’s direct costs, be held pending its order on the County’s
objection. To that end, the Court directed the parties to submit stipulations regarding
the completed Sale No. 3 results. Several of the tracts garnered sufficient sales
proceeds to pay the County more than one-half of the tax due on them.14


Whether Sedgwick County is bound by the provisions of the confirmed plan
that allowed its secured claims in a reduced amount depends upon whether it
received appropriate notice of the plan in time to request to be heard. The County
says that the notice of the plan was internally misdirected, depriving it of an
opportunity to object and be heard. Fed. R. Bankr. P. 2002(b) requires that notice of
the plan, along with an accompanying disclosure statement, be served on all creditors
and parties in interest in a case and that they should have 28 days to file an objection.
Notices are to be mailed to creditors at an address they request. Rule 2002(g)(1)(A)
provides that when a creditor files a proof of claim that designates a mailing address,
that filing represents a filed request for mailed notice at that address. The parties
here agree that the GAL mailed the plan, disclosure statement, and notice to creditors

13 Dkt. 475 (Sale No. 3 Motion); Dkt. 482 (Objection). The GAL filed a detailed
response to the County’s objection. Dkt. 483.
14 See Dkt. 501 and 503 (Stipulations regarding Sale No. 3).


Case 11-11291 Doc# 524 Filed 04/02/15 Page 5 of 8

to the County at the address shown on its proof of claim.15 Service of the notice was
therefore sufficient.

The County didn’t object and the plan, containing the treatment of which it
belatedly complains, was confirmed. As § 1141(a) provides, a confirmed plan binds all
creditors whether or not they have accepted the plan. The GAL’s plan provided for
the debtor’s property to remain in the bankruptcy estate at confirmation while the
GAL determined whether to liquidate it or to retain it in the Trust established under
the plan for the debtor’s care and maintenance. Once confirmation occurs, § 1141(c)
states that the property of the estate is free and clear of all claims and interests of
creditors except to the extent those creditor’s debts were somehow excepted from the
debtor’s discharge under § 1141(d)(2). Section 1141(d)(2) incorporates any debt
excepted from discharge under § 523.16

It is this latter provision, specifically § 523(a)(1)(A), upon which the County
relies in its objection to the GAL’s Sale No. 3. The County says that its real property
tax claims should be excepted from Rice’s discharge and that the properties they
burden should remain subject to property tax liens in the original, not the adjusted,
amounts. This argument fails for two reasons.

First, the only part of the tax claim that would be excepted from discharge is
the property tax that came due for 2009 and 2010. The debtor owed unpaid ad

15 See Dkt. 409 with attached matrix, p.3 and Claim No. 5.
16 Section 523(a)(1)(A) in turn references taxes of the kind specified in § 507(a)(8).
Property taxes are among the kind of taxes included in subpart (B) of § 507(a)(8).


Case 11-11291 Doc# 524 Filed 04/02/15 Page 6 of 8

valorem taxes dating from 2006.17 He didn’t file this case until May 1, 2011. At that

time, his 2009 ad valorem taxes were last payable without penalty on May 10, 2010

and his 2010 taxes were payable on the same date in 2011. Section 523(a)(1) only

excepts from discharge the priority portion of a tax claim allowable under §

507(a)(8)(B). That subsection only grants priority status to ad valorem tax claims that

were payable without penalty a year before the date of the petition. As the GAL notes,

only the 2009 and 2010 taxes could be eligible for priority treatment; the other years

are properly classified as secured claims.18

Second, and of ultimate importance here, the County failed to object to the

plan’s confirmation. With that confirmation, the allowance of the County’s secured

claims became final and binding on the County. As numerous courts have held, once

17 In Kansas, real estate taxes become due and a lien automatically attaches to the
real estate on November 1 for each year that taxes are levied. KAN. STAT. ANN. § 791804
(1997). Section 79-2004(a) (2014 Supp.) permits the taxpayer to either pay the
full amount on December 20 or may opt to pay one-half on December 20 and the
remaining one-half on May 10 of the next year.
18 Though it seems unlikely, we need not decide whether the debtor has personal
liability for these priority taxes after discharge today because, in an individual
chapter 11 case, the debtor does not receive a discharge until completion of all plan
payments; confirmation of the plan does not discharge any debt provided for in the
plan. See Bd. of Comm'rs of Ness Cnty. v. Hopper, 110 Kan. 501, 204 P. 536 (1922)
(absent statutory provision so stating, title holder has no personal liability for any
deficiency after tax foreclosure sale); see also § 1141(d)(5).The effect of confirmationunder this debtor’s plan is expressly made “[s]ubject to the limitations of 11 U.S.C. §
1141(d).” See Dkt. 405, p. 23, § 9.1. See also In re Artisan Woodworkers, 225 B.R.
185, 190-91 (9th Cir. BAP 1998) (Confirmed chapter 11 plan may not extinguish or
discharge an otherwise nondischargeable debt, even when creditor fails toparticipate in plan confirmation process); In re Newman, 399 B.R. 541, 547 (Bankr.

M.D. Fla. 2008) (individual chapter 11 plan that was confirmed did not extinguish
otherwise nondischargeable debt, even where the debt was provided for in the plan);
In re DePaolo, 45 F.3d 373, 375-76 (10th Cir. 1995).

Case 11-11291 Doc# 524 Filed 04/02/15 Page 7 of 8

a creditor receives appropriate notice and fails to act, and once the plan is confirmed,
the creditor is bound by its terms and may no longer enforce its pre-confirmation


Sedgwick County’s objection to the GAL’s Motion for Sale No. 3 is therefore
overruled; the GAL is authorized to distribute the proceeds of the sale of the contested
tracts as set out in the confirmed plan and Notice of Sale.

# # #

19 In re American Properties, Inc., 30 B.R. 239, 246-47 (Bankr. D. Kan. 1983); United
States v. Victor, 121 F.3d 1383, 1387-88 (10th Cir. 1997) (tax discharge exceptionand statute governing priority of allowed unsecured tax claims inapplicable to
secured tax claims and therefore tax creditor with secured tax claim who did not
object to confirmation was bound by confirmed chapter 11 plan).


Case 11-11291 Doc# 524 Filed 04/02/15 Page 8 of 8

14-11766 Gaines and Watson (Doc. # 54)

In Re Gaines and Watson, 14-11766 (Bankr. D. Kan. May 15, 2015) Doc. # 54

PDFClick here for the pdf document.


SIGNED this 14th day of May, 2015.




IN RE: )
ROBERT DALE GAINES and ) Case No. 14-11766
TINA LEA WATSON, ) Chapter 13
Debtors. )



Kansas recognizes common law marriages. If each member of a couple has
capacity to marry, intends to be married, and holds themselves out as husband and
wife, common law deems them wed. Married couples may file joint bankruptcy cases.
But if the couple’s marital status is challenged, it is their burden to prove that they
are married as a matter of law and therefore entitled to relief. Kansas homestead law
preserves the exempt character of a debtor’s homestead unless a creditor can
demonstrate by “positive and clear evidence” that the debtor has abandoned the home


Case 14-11766 Doc# 54 Filed 05/14/15 Page 1 of 20

without intention to return. This case presents an interesting intersection of those
two state law principles.1

After Robert Gaines and his former wife were divorced, he became romantically
involved with Tina Watson, living with her in Salina, Kansas. When she became ill,
he and she declared to Robert’s employer that they were domestic partners and he
enrolled her in his employer’s health insurance plan. Each testified to their devotion
to one another, that they consider themselves married, and that they hold themselves
out as married. When they began to live together, both had been divorced. If they
demonstrated that they met the three standards for common law marriage on the
date they filed this case, they are eligible to be joint debtors. Robert owns the home
that Tina periodically inhabited in Oberlin (first from 2008-2010 and again later from
July 2013 to and including the date of the bankruptcy petition), but both debtors
relocated to Salina for work in 2010 where they lived together part of the time during
which they claimed they were married. They claim the Oberlin house as their
homestead, stating that they intend to return to Oberlin to live. Whether they’re
married or not, if each debtor has demonstrated the requisite intent to return to and
inhabit the house in Oberlin as their homestead, the Oberlin house retains its exempt


1 The chapter 13 trustee Laurie B. Williams appears by her attorney Karin N.
Amyx. The debtors appear by their attorney Rick Hodge.


Case 14-11766 Doc# 54 Filed 05/14/15 Page 2 of 20

Sometime in the late 1990s, Robert and Tina met while they were working for
the school district in Brighton, Colorado and formed a friendship. Each was married
to someone else then, but they were both having marital issues. Robert had lived in
Oberlin, Kansas as a child and relocated there from Colorado in 2000 when he
purchased a home on Beaver Street. He worked out of his garage as a mechanic and
lived there with his wife, Celeste, until they left Oberlin sometime around 2008.
Robert eventually took a job at Phillips Lighting in Salina, about 200 miles east of
Oberlin. Though it isn’t clear when, it appears that he and Celeste relocated to Salina
in 2010, renting a home on Seitz Avenue. He and Celeste separated in 2010 and were
divorced by the Saline County District Court in 2011.

Meanwhile, Tina had moved with her mother and daughter to Oberlin
sometime in 2008. Now divorced, Tina moved her family into the Beaver Street
property, apparently with Robert’s permission.2 He stated that she was in trouble
and he was helping to extricate her from “a bad situation.” She lived there until 2010
when her job at the Oberlin Chamber of Commerce was eliminated. Robert
encouraged her to come to Salina where he found her a place to live and a job at
Casey’s General Store. According to the Statement of Financial Affairs (SOFA),
Question 15, she lived at 330½ South 8th in Salina beginning in July of 2010.3 Robert
testified that after he got divorced, he moved in with her. The SOFA suggests that

2 When Tina moved from Colorado to Kansas she obtained a Kansas driver’s license.
Issued on November 4, 2008, it expired on September 11, 2014 but Tina has not
renewed it. It bears the Beaver Street, Oberlin address. See Ex. 3.
3 When Tina moved to Salina, Robert rented the Oberlin property out to tenants
between July 2010 and July 2013.


Case 14-11766 Doc# 54 Filed 05/14/15 Page 3 of 20

they also occupied a property on Briarwood in Salina (August 2011 to June 2013)
before they leased the current Hartford address property in Salina, where Robert
lived at the time this case was filed.

Robert owns the Oberlin house outright; Tina and he have possessions in both
places. Tina moved back to Oberlin sometime in 2013 after the tenants vacated the
Beaver Street property. For some indefinite period after that, Robert would travel to
Oberlin on weekends to see Tina or vice versa. Robert described Tina’s move back to
Oberlin as a “cost-cutting” measure. Since July 2013, Tina has lived at various times
in both Oberlin and Salina. They occupied a series of residences, though it is
somewhat unclear in what order or how long they resided at each. It does appear that
they lived together at various times but, on July 31, 2014, the date of the petition,
they were living apart.4 Both debtors testified that they intend to return to Oberlin
to live full time because the Salina Phillips Lighting plant is for sale and may well
close. To this end, they purportedly mailed an undated letter to their landlord a week
before the trial of this matter to advise the landlord of their intent to terminate the
tenancy on Hartford and move out by the end of April 2015.5 Robert testified that he
intends to live permanently in the Beaver house – as his retirement home. Tina is
not currently working but may return to Casey’s General Store to complete training
for a management position to enable her to transfer to a store near Oberlin.

4 The petition shows Robert having a current address at the Hartford property inSalina while Tina has a current address at the Beaver property in Oberlin. ScheduleJ, line 24 indicates they are currently living apart.
5 Ex. 4. This undated document introduced into evidence is the only one where Tina
used the “Gaines” surname.


Case 14-11766 Doc# 54 Filed 05/14/15 Page 4 of 20

Tina became ill at some point in their relationship and required
hospitalization. She has a chronic illness that apparently manifested itself in
February of 2014. There are no physician specialists in Oberlin so she seeks periodic
medical care in Salina. When Tina became acutely ill in February of 2014, Robert and
she decided it was time for them to “quit playing house” as he put it. According to
Robert, Tina’s health event was the definitive moment when he and Tina became
husband and wife. He then took measures to place her on Phillips Lighting’s employee
health plan as his dependent. He enrolled Tina shortly thereafter, claiming her as his
“domestic partner.” As part of the paperwork, both Tina and Robert executed a
“Phillips Health Plans Document of Domestic Partnership” or DDP.6 The DDP states
the signers “certify” that they are eligible for coverage as “domestic partners” under
the company’s health plan and that they are, among other things, at least 18, not
related by blood or adoptions, live together in a committed monogamous relationship,
and have been in such a relationship for the prior six months. They also certify that
they “are not married to each other or legally married to, or in a domestic partnership
with, any other person.” The DDP that debtors offered in evidence is undated.

Additional documentation accompanying the DDP that appears to have been
printed from the company benefits website defines “domestic partner” as someone of
the same or opposite sex who is an adult partner of the employee living together for
at least six months, mutually dependent and financially responsible for one another’s
wellbeing, not related to one another and not married to or a domestic partner of a

6 Ex. 8, p. 18.


Case 14-11766 Doc# 54 Filed 05/14/15 Page 5 of 20

third party. The domestic partner definition doesn’t exclude a person who is married
to the employee.7 At the same time, a spouse qualifies as a dependent and Robert
could have enrolled Tina as his spouse if they were in a common law marriage at that


It is unclear if Robert was able to add Tina to his employer’s health coverage
when they executed the DDP document mid-year. The same website screenshot
suggests that he was outside the enrollment window to add Tina as a dependent to
his employer’s health plan in 2014.9 Both of Robert’s 2014 and 2015 Enrollment
Summaries that show Tina as his dependent for health coverage were “selected” as
of December 2, 2014, suggesting that Tina was not actually enrolled as a dependent
domestic partner under Robert’s health plan until late 2014 or more likely, 2015.10
Finally, Robert also named Tina as his beneficiary under a life insurance policy
obtained through his employment.11

Robert and Tina filed separate Form 1040 tax returns for 2012, 2013, and 2014.
Each filed as a “single” taxpayer. They amended their respective 2014 returns to file
as “married filing separately,” signing those amended returns on March 11, 2015, a
week before the trial of this matter.12 They testified that they amended their 2014

7 Id. at p. 22.
8 A domestic partner is clearly a separate and distinct dependent category from a
married person under the health plan. Both relationships qualify as eligible
dependents of the employee under Robert’s health plan. See Ex. 8, p.21.

Id. The screen also cautions that “[a]dding a dependent here does NOT
automatically enroll him/her in any benefits.”
10 Id. at pp. 19-20.
11 Id. at p. 23.
12 Ex. 6 and 7.


Case 14-11766 Doc# 54 Filed 05/14/15 Page 6 of 20

returns because their accountant told them that filing as single persons could be
construed as tax fraud. Their explanation provided on the amended returns states
that they are common law husband and wife and that their attorney advised them
they “had to file married filing separate.”13

In his testimony, Robert insisted that he often referred to Tina as his wife in
conversations with third parties. She agreed that he acted like a husband, bringing
her lunch to work, for instance, and that they had acted as husband and wife as early
as 2012 when Robert proposed to her while they were on a motorcycle ride. There was
no evidence that they obtained or wore wedding rings. According to Robert, Tina was
a signatory on his bank account but not an account owner due to her prior history of
unpaid debts. Their bankruptcy intake questionnaire dated June 10, 2014 shows Tina
as Robert’s spouse and both living at the Hartford address in Salina.14

Robert and Tina filed their joint chapter 13 petition on July 31, 2014. Robert
listed his address as the Hartford Street, Salina address while Tina, as joint debtor,
listed her address as the 302 N. Beaver, Oberlin address.15 On Schedule J, line 24,
debtors state that they “live apart right now,” but anticipate Robert moving to Oberlin
if he loses his employment with Phillips in Salina. They claimed this Beaver property
as their exempt homestead. In their first amended chapter 13 plan they propose to

13 Ex. 6 and 7, Part III of Form 1040X. Both amended returns listed the Hartford
address in Salina as their current home address.
14 Ex. 1.
15 The Court notes that on December 2, 2014, Tina filed a change of address from “302

N. Beaver, Oberlin, KS 67749” to “306 N. Beaver Ave., Oberlin, KS 67749.” See Dkt.
28. On the notice, Tina used the surname of Gaines. This change of address was not
mentioned at trial.

Case 14-11766 Doc# 54 Filed 05/14/15 Page 7 of 20

pay $250 per month over an applicable commitment period of 60 months but seek to
deviate from the disposable income calculation on Form 22C under In re Lanning,
due to Tina’s unemployment, and propose no distribution to unsecured creditors.16
The chapter 13 trustee objects to the claimed homestead exemption on the basis that
Robert does not occupy the Oberlin property as his principal residence.17 She also
objects to confirmation of the plan and filed a motion for dismissal under 11 U.S.C. §
302 on the basis that debtors are not married and ineligible to file a joint case.18 At
trial, the evidence focused on the debtors’ eligibility to be joint debtors and their
homestead exemption. In post-trial briefing, debtors submitted a certified copy of
Robert’s divorce decree from Celeste entered by the Saline County District Court on
February 2, 2011 to support his trial testimony.19 The trustee objects to admission of
this document as part of the evidentiary record and asks that it be stricken and not
considered by the Court.20 The Court will address the propriety of considering the
divorce decree when it addresses the common law marriage issue below.


Is the 302 N. Beaver, Oberlin residence the debtors’ homestead?

16 Dkt. 36.
17 Dkt. 16.
18 Dkt. 22 and 38.
19 Dkt. 50. In closing argument, the chapter 13 trustee questioned Robert’s capacity
to marry Tina because she challenged Robert’s proof that he had obtained a divorce
from Celeste as he testified. The trustee had offered no proof into evidence that Robert
remained married to Celeste but suggested that she was unable to find any record of
their divorce decree. Robert’s divorce from Celeste was essential to demonstrate that
he had the capacity to marry Tina.
20 Dkt. 51.


Case 14-11766 Doc# 54 Filed 05/14/15 Page 8 of 20

The Trustee objects to the debtors’ homestead exemption.21 She argues that

Robert’s and Tina’s repeated absence amounts to an abandonment of the homestead.

Kansas residents may claim their home as a homestead if they meet the following

criteria set out in the Kansas Constitution and statutes. KAN. STAT. ANN. § 60-2301

implements the homestead exemption afforded all Kansans in the Kansas

Constitution at Article 15, § 9. Section 9 provides that—

A homestead to the extent of one hundred and sixty acres of farming land, orof one acre within the limits of an incorporated town or city, occupied as a
residence by the family of the owner, together with all the improvements on
the same, shall be exempted from forced sale under any process of law, and
shall not be alienated without the joint consent of husband and wife, when thatrelation exists; . . .22

The statutory exemption § 60-2301 contains the same provisions almost

verbatim.23 11 U.S.C. § 522(b)(2) authorizes a debtor to elect to claim property exempt

for his bankruptcy estate if it is exempt at state law and if such an election is

permitted under state law. Kansas law directs that, with certain exceptions not

relevant here, debtors may only claim state law exemptions.24 Parties in bankruptcy

cases who file timely objections to exemptions bear the burden of proving the

exemption is not properly claimed.25 Here, the trustee’s principle objection is that

21 Dkt. 16.
22 KAN. CONST. Art. 15, § 9.
23 KAN. STAT. ANN. § 60-2301 (2014 Supp.). In addition to the language in the state
constitution, the statutory provision makes clear that a homestead exemption may
be claimed in a manufactured home or mobile home occupied as a residence. It also
clarifies that when property outside a city is claimed exempt, the homestead rights
are not lost when the property is subsequently annexed by the city. See KAN. STAT.
ANN. § 12-524a (2014 Supp.).
24 KAN. STAT. ANN. § 60-2312(a) (2005).
25 Fed. R. Bankr. P. 4003(c); In re Letterman, 356 B.R. 540, 542 (Bankr. D. Kan. 2006).


Case 14-11766 Doc# 54 Filed 05/14/15 Page 9 of 20

Robert is absent from Oberlin and maintains a residence in Salina. Robert credibly
testified that he has retained the house, which is unencumbered, as a retirement
home. He also testified that his employer was about to sell its plant in Salina and
that he would move back to Oberlin and live in the home there. He acted upon this
intent by giving notice to his landlord of his intent to terminate his Salina tenancy at
the end of April, 2015, and move back to “our home in Oberlin.” He allowed Tina to
live there as his wife or domestic partner since July of 2013 and they had belongings
and furnishings in the Oberlin home. The trustee did not effectively controvert any
of this testimony.

A long line of Kansas cases holds that when an absent homesteader shows an
intention to return, the uninhabited homestead retains its exempt character. In
Bellport v. Harder, the Kansas Supreme Court said that “[W]hile occupancy as a
residence is essential to the establishment of a homestead, once a residence has been
established, such residence is presumed to continue until the contrary is clearly
shown.”26 Even a debtor’s acquiring property and residing in another state does not
terminate the homestead in the absence of “positive and clear” evidence.27 Nor does
the fact that Robert rented the Oberlin home to tenants for a few years during his
absence establish an abandonment of the homestead.28 The trustee didn’t show that
Robert had taken any steps, other than being absent for an extended period of time,
to terminate his homestead interest. She certainly did not prove by positive and clear

26 Bellport v. Harder, 196 Kan. 294, 298, 411 P.2d 725 (1966).
27 Elliott v. Parlin & Orendorff Co., 71 Kan. 665, 81 Pac. 500, 501 (1905).
28 Bellport, supra at 298.


Case 14-11766 Doc# 54 Filed 05/14/15 Page 10 of 20

evidence that he has abandoned the Oberlin property; nor did she meet the
presumption that a homestead continues once it has been established. To the
contrary, while working his job in Salina, Robert comes and goes from there
frequently and allows Tina to live there, too. They have personal belongings at the
Oberlin home. He and she pay utilities and otherwise maintains the property. At a
minimum, Robert has clearly demonstrated his intent to return to the Oberlin
property upon ending his employment in Salina and retiring to his permanent
residence with Tina.29

The same rules apply to determining whether Tina’s homestead exemption
claim is valid, though she is in a different position because she has inhabited the
property since 2013, as either Robert’s domestic partner, his common law wife, or
simply at Robert’s sufferance. She moved from Salina back to Oberlin in the summer
of 2013 and has occupied the property since that time, with periodic trips to Salina
for medical care or to spend time with Robert. Tina listed the Oberlin property as her
current address on the bankruptcy petition. Her lack of a record title interest does
not weaken her homestead claim if she occupies the home as a family residence.
Indeed, in Redmond v. Kester, the Kansas Supreme Court held that the term “owner”
in both the Constitution and the statute includes occupants who hold any type of
interest, including the equitable interest that a beneficiary of a self-settled living

29 See Beard v. Montgomery Ward and Co., 215 Kan. 343, 348, 524 P.2d 1159 (1974)
(Residence means the place adopted by a person as his place of habitation, and towhich, whenever he is absent, he has the intention of returning.).


Case 14-11766 Doc# 54 Filed 05/14/15 Page 11 of 20

trust holds.30 So even if Tina is not married to Robert and cannot claim a homestead
interest as his spouse, her previously-established occupancy of that property as his
domestic partner would suffice to render her interest in the home exempt as well.31
Nothing the trustee has presented overcomes Tina’s established occupancy nor her
intent to continue to occupy the home with Robert, either as his domestic partner or
his common law spouse. Keeping in mind Kansas policy to liberally construe claims
of homestead exemption and the trustee’s burden of proof on an exemption claim, the
trustee’s objection to Robert and Tina’s homestead exemption must be overruled.32

Were Robert Gaines and Tina Watson married when the bankruptcy
case was filed?

This is a much closer question. Kansas has long recognized common law
marriages. In general, if a man and a woman have the capacity to marry, if they
presently agree to be married, and if they hold themselves out to the public as being
married, state law recognizes them as husband and wife.33 It is essential that the

30 Redmond v. Kester, 284 Kan. 209, 216, 159 P.3d 1004 (2007). See also In re Estate
of Fink, 4 Kan. App. 2d 523, 532-33, 609 P.2d 211 (1980) (Even though wife lefthomestead due to husband’s drinking, and property was sold after his death to herchildren, she intended to inhabit the home they intended to build for her. Her
homestead interest through her husband continued without regard to her loss ofactual record title ownership of the fee.).
31 Redmond v. Kester, supra at 216 (Debtors may claim homestead exemption basedon any interest in real estate, whether legal or equitable, as long as they have notabandoned their occupation or intent to occupy the property.). See also In re Brown,
408 B.R. 262 (Bankr. D. Minn. 2009) (Debtor who occupied homestead with hisdomestic partner had equitable interest in property and could claim property exempt
even though it was titled in the name of the other partner.).
32 Redmond v. Kester, supra at 212.
33 Fleming v. Fleming, 221 Kan. 290, 291, 559 P.2d 329 (1977).


Case 14-11766 Doc# 54 Filed 05/14/15 Page 12 of 20

parties have a present mutual intention to be married; evidence of consent to cohabit,
without a present marriage agreement between them, is insufficient.34 The party
asserting a common law marriage has the burden of proving it.35 Only married
debtors may file a joint bankruptcy case under 11 U.S.C. § 302. Here, the trustee
asserts that Robert Gaines and Tina Watson were not married as a matter of law on
the date of the petition, July 31, 2014, and cannot seek joint relief.

Both debtors testified that they were divorced from their prior spouses before
moving in together. Nothing in the record sheds doubt on their being free to marry at
any time after Robert’s divorce in 2011.36 At trial, each testified that they consider
themselves married and described generally how they hold themselves out to the
world as being married. But the evidence that was presented requires deeper
examination because whether Robert and Tina shared a present intention to be
married is less than clear. The Court did not have the benefit of any independent
witnesses regarding the debtors’ relationship to corroborate the debtors’ testimony
and is left to determine the credibility of the debtors’ testimony and the weight to be
given the limited documentary evidence presented to ascertain the debtors’ intent.
The Court is troubled by the inconsistencies in the debtors’ testimony and the lack of

34 Id.
35 Driscoll v. Driscoll, 220 Kan. 225, 227, 552 P.2d 629 (1976).
36 Robert Gaines testified affirmatively that he obtained a divorce from his then-wifeCeleste in 2011, but did not offer at trial a copy of his divorce decree. Debtors’ counsel
appended a certified copy of the Saline County District Court decree to his post-trialbrief and the trustee moved to strike it. Because Robert’s testimony was not refutedwith evidence at trial, there is sufficient evidence in the record without the decree to
find that he had the capacity to marry at the time he and Tina began cohabiting.


Case 14-11766 Doc# 54 Filed 05/14/15 Page 13 of 20

corroborating documents that would have been within the debtors’ control to

Robert and Tina reconnected after several years in 2010, the same year that
Robert separated from his then-wife. Tina had been living in Oberlin (in Robert’s
home) and after she lost her job there, he arranged for her to move to Salina and
helped her find a job. He testified that when he lost his home in Salina, after getting
divorced, he moved in with her. Thus, sometime in 2011, they began cohabitating.
Each testified that they began “seeing” one another romantically in 2012 and that
Robert asked Tina if she wanted to get married in 2012 while they were on a
motorcycle ride. But neither Robert nor Tina testified that they considered
themselves married as early as 2012; in fact, neither of them testified clearly how
long they had been in a common law marriage. Robert cited Tina’s illness in February
2014 as the defining moment and time to “quit playing house.” By contrast, Tina
testified that she “sometimes thinks” they might get married. Even if the Court
accepts Robert’s testimony, their actions belie their words.

37 For example, no lease agreement was offered into evidence showing Robert and
Tina as joint tenants of the Hartford property, or any other rented property, in Salina.
No bank records or other financial records were introduced to show that theycombined their financial affairs. No utility billing statements were presented to showthat utilities were set up in both of their names. No car titles were introduced showing
joint ownership of vehicles. In fact, the only documents admitted into evidence that
suggesting a marital relationship, were the debtors’ bankruptcy intake
questionnaire, an undated notice of vacating the Hartford tenancy signed by “Boband Tina Gaines,” and an amended 2014 tax return. The latter two documents were
generated about a week before trial.


Case 14-11766 Doc# 54 Filed 05/14/15 Page 14 of 20

While they lived together in Salina, Robert and Tina jointly occupied several
leased homes and purchased a storage shed. They received their mail at Salina and
sometimes received mail addressed to them both. They began referring to each other
as husband and wife to third parties. Tina returned to Robert’s home in Oberlin in
July of 2013 while Robert remained in Salina and worked. At that point, they both
went back and forth between Salina and Oberlin. Robert traveled on weekends to
spend time with Tina and Tina would travel to Salina periodically for medical care or
to be with Robert. Robert testified that they decided to stop “playing house” and to do
whatever was necessary to get Tina on Robert’s workplace health plan after she
became ill in February of 2014. There is no evidence of when they executed the DDP.
When they sought bankruptcy advice from their counsel, they represented
themselves as husband and wife on the intake sheet. When they filed this case they
listed separate addresses – Tina in Oberlin and Robert in Salina. After they filed this
case, they filed their 2014 federal income tax returns as single taxpayers, then
amended them in March of 2015 to file as “married filing separately.” On their
amended returns, they each listed the Hartford address in Salina as their current
home address. Their 2012 and 2013 returns were filed as single taxpayers. But
shortly before trial of this matter, debtors signed an undated notice of their vacating
the Hartford tenancy as “Bob and Tina Gaines.” This is the only document in evidence
where Tina used Robert’s surname.

The question of whether a couple is married at common law arises in many
different legal settings and is highly fact-intensive. Several cases illustrate this point.


Case 14-11766 Doc# 54 Filed 05/14/15 Page 15 of 20

In Fleming v. Fleming, the parties divorced in 1969. Mrs. Fleming received an
alimony award that terminated upon her death or remarriage. She moved in with
another man, prompting Mr. Fleming to move to terminate his alimony obligation by
claiming she’d remarried. The state district court held that Mrs. Fleming and her
companion were not married as a matter of law. The Supreme Court affirmed, finding
that there was no evidence that the companion had undertaken to support Mrs.
Fleming or that there was any “present agreement” between them to be married. Her
cohabitation did not supply Mr. Fleming grounds to terminate his alimony

In Eaton v. Johnston, the Supreme Court considered the legal relationship of
a couple who were divorced in 1977 after a 20 year marriage, but who reestablished
a common residence together shortly thereafter, remaining together for another 30
months. They incorporated a business and jointly purchased a home. When they split
up again, Ms. Eaton filed an action seeking a declaration that she and Mr. Johnston
had not remarried or, in the alternative, for divorce. The state district court concluded
that Ms. Eaton had consistently denied the existence of a marriage agreement, that
on several occasions Mr. Johnston asked her to remarry him, and that they filed
separate tax returns as single taxpayers. Mr. Johnston was also involved with
another woman whom he told his family he planned to marry. On these facts, the
court concluded that no common law marriage had occurred and that the couple’s
property could not be divided under KAN. STAT. ANN. § 60-1606 (now KAN. STAT. ANN.

38 221 Kan. 290, 293.


Case 14-11766 Doc# 54 Filed 05/14/15 Page 16 of 20

§ 23-2706) which specifically applied to the division of marital property whether or
not a decree of divorce or separate maintenance was granted. The Supreme Court
affirmed this finding and held that the trial court had authority independent of § 601606
to divide the parties’ property.39

Another case in which the court found a lack of present marriage agreement is
Schrader v. Schrader.40 There, the parties divorced after just six years (and two
children), but again began living together, “this time without bothering with anything
so trivial as legal formalities.”41 They displayed some public characteristics of being
married, but their personal behavior toward each other and to the outside world
indicated otherwise. The court found that while the parties filed joint income tax
returns and lived together, there was no present understanding that they were
married. Mrs. Schrader testified that she didn’t formally marry Mr. Schrader again
because she wasn’t sure enough of their relationship to do so and would have an out
if things went badly again. Mr. Schrader corroborated this, stating that they agreed
to live together for their children and, if things worked out, they’d remarry. So, while
there was evidence of their holding themselves out as married, there was none of a
present intention to be married. The Supreme Court affirmed.42

These three cases suggest that the existence of a publicly visible and complex
joint living arrangement may satisfy the “holding out” factor, but is not enough to

39 Eaton v. Johnston, 235 Kan. 323, 328-29, 681 P.2d 606 (1984).
40 207 Kan. 349, 484 P.2d 1007 (1971), disapproved on other grounds by Eaton v.
Johnston, 235 Kan. 323, 681 P. 2d 606 (1984).
41 207 Kan. 349, 350.
42 Id. at 351.


Case 14-11766 Doc# 54 Filed 05/14/15 Page 17 of 20

demonstrate a shared present intention to be married, particularly where the parties
have an “out” or their relationship is subject to a future contingency. The cases also
state that the parties cannot take actions or legal positions that suggest contrary
intent. These parties did.

Two pieces of documentary evidence are particularly damning to debtors’ claim
of a present marriage agreement necessary to establish a common law marriage.
First, Robert and Tina did not file tax returns as married people until they filed their
2014 returns, doing so long after this case was filed and long after the trustee had
filed her § 302 motion to dismiss, making it clear to debtors that she was challenging
their eligibility to be joint debtors. Even then, the 2014 returns offered in evidence
were amended returns that were filed in March of 2015 to reflect that they were
changing their filing status from single to “married filing separately,” and were
amended upon their attorney’s advice.43 Second, when they signed the DDP to obtain
health care coverage for Tina as a dependent under Robert’s employer’s plan, they
certified that they were “not married to each other.”44 This all occurred within a few
months of their filing this bankruptcy petition and, according to Robert, was the
definitive moment when he considered himself married to Tina. The inconsistency
here is that, according to the employer’s website, a “spouse” qualifies as a dependent
of the employee and is eligible for coverage under the employer’s health plan.45 Tina

43 See Ex. 6 and 7. No evidence was presented that debtors amended their filing status
for tax years 2012 or 2013.
44 See Ex. 8, p. 18.
45 Id. at p. 21.


Case 14-11766 Doc# 54 Filed 05/14/15 Page 18 of 20

was not claimed as an eligible dependent as Robert’s spouse, but as his domestic
partner. Both he and she signed the DDP, suggesting that they did not consider
themselves to be married at this time. Nor did they offer any evidence that debtors
subsequently formed a present marriage agreement between May of 2014 and the
date of filing, July 31, 2014.

These are not the only proof problems, either. Further undercutting their
position is the testimony that Robert proposed to Tina in 2012 and that Tina testified
she sometime thinks they will get married eventually, suggesting that she doesn’t
think they’re married now. They do not consistently cohabitate. In fact, on the
petition date, Robert and Tina were living in towns 200 miles apart. Other than their
living in leased property together and purchasing a shed, there is no evidence of joint
economic activity. Nor is there any evidence that beyond placing her on the Phillips
health insurance plan as a domestic partner, Robert has actually undertaken to
provide Tina with support, though he clearly does support her. They did not prove
how, or even if they have combined their finances, whether they have ever affirmed
their commitment to each other in the presence of other witnesses, whether they have
exchanged rings, or if they have otherwise manifested the require present intent.
Proof that they have lived together prior to filing their bankruptcy and proof that
they intend to ultimately live together in Robert’s Oberlin home is insufficient to
establish a common law marriage. While I am persuaded that Robert and Tina may
hold themselves out as married, they failed to carry their burden to prove that they
presently intended to be married when the case was filed on July 31, 2014.


Case 14-11766 Doc# 54 Filed 05/14/15 Page 19 of 20

Because the debtors were not married on the petition date, this case cannot
proceed as a joint case.46 This leaves the debtors two alternatives. They can seek to
deconsolidate and proceed in separate chapter 13 cases. Failing that, I must deny
confirmation and dismiss the case because they are ineligible to proceed jointly and
therefore have not complied with the provisions of Title 11 and chapter 13, meaning
that they cannot demonstrate their compliance with 11 U.S.C. § 1325(a)(1). The
debtors shall have 14 days to file a motion to deconsolidate or their case will be
dismissed without further notice.

# # #

46 11 U.S.C. § 302.
Case 14-11766 Doc# 54 Filed 05/14/15 Page 20 of 20


14-10847 Bibbs (Doc. # 51)

In Re Bibbs, 14-10847 (Bankr. D. Kan. Mar. 31, 2015) Doc. # 51

PDFClick here for the pdf document.

SIGNED this 31st day of March, 2015.




Case No. 14-10847
Chapter 13



To determine the meaning of the term “purchase money security interest” as
that term is used in the hanging paragraph after 11 U.S.C. § 1325(a)(9)(*), courts look
look first to that term’s familiar definition in the Uniform Commercial Code.1 As
enacted in Kansas, KAN. STAT. ANN. § 84-9-103 provides that a security interest attains

1 In re Ford, 387 B.R. 827, 829 (Bankr. D. Kan. 2008), aff’d 574 F.3d 1279 (10th Cir.
2009)(direct appeal).


Case 14-10847 Doc# 51 Filed 03/31/15 Page 1 of 7

attains purchase-money status to the extent the goods in question are “purchase“
purchase-money collateral.”2 “Purchase-money collateral,” in turn, includes goods that
that secure a “purchase-money obligation”3 and a “purchase-money obligation” is one
one for “value given to enable the debtor to acquire rights in . . . the collateral if the
value is in fact so used.”4 Section 1325(a)(9)(*) provides that if a debtor incurred a debt
debt to purchase a motor vehicle for personal use within 910 days of the date of filing
filing and granted a purchase-money security interest to secure repayment of the loan,
loan, the bifurcation provisions of § 506 no longer apply to that debt, meaning that the
the creditor’s allowed claim must be paid in full without regard to the collateral’s

In the present case, Donita Bibbs borrowed money to buy her Toyota on October
13, 2011 and granted K-State Federal Credit Union a purchase money security interest
in the car. On October 23, 2012, she executed a new note that modified the old debt by
permitting her to make bi-weekly payments rather than monthly payments. She filed
this case on April 21, 2014, 921 days after first incurring the debt, but KSFCU claims
that because of her subsequent refinance during the 910-day counting period, she
cannot bifurcated its claim. Ms. Bibbs “incurred” the purchase-money debt more than
910 days prior to filing her case. KSFCU’s claim is therefore not entitled to “910” status
and its objection to confirmation is overruled.

2 KAN. STAT. ANN. § 84-9-103(b) (2014 Supp.).
3 KAN. STAT. ANN. § 84-9-103(a)(1) (2014 Supp.).
4 KAN. STAT. ANN. § 84-9-103(a)(2) (2014 Supp.).


Case 14-10847 Doc# 51 Filed 03/31/15 Page 2 of 7


A proceeding for confirmation of a plan is a core proceeding over which this
Court may exercise jurisdiction.5


Ms. Bibbs executed a Loanliner agreement with KSFCU on October 13, 2011.
She borrowed $6,852, $6,000 of which was directly disbursed to a dealer to allow Ms.
Bibbs to buy a 2002 Toyota Camry. The purpose of the loan is noted on the face of the
instrument—“purchase vehicle.” She agreed to make $250 monthly payments over 39
months. The balance of the loan funds paid the premium for GAP insurance, car titling
fees, and a $500 deposit into her account for personal use. On October 23, 2012, Ms.
Bibbs signed another Loanliner agreement with KSFCU to refinance $6,266.44,
payable at the same interest rate (18%), but in 65 bi-weekly $125 payments rather
than $250 monthly payments. The Camry remained the only collateral for this loan
and Ms. Bibbs received no additional funds under this agreement. Ms. Bibbs filed this
case on April 21, 2014, within 910 days of the latter agreement, but 921 days after the
first one.

In her first plan, Ms. Bibbs proposed to treat KSFCU’s claim as a “910” claim
and to pay KSFCU in full.6 The chapter 13 trustee objected, noting that the loan was

5 28 U.S.C. § 157(b)(1) and (b)(2)(L) and § 1334. The chapter 13 trustee and securedcar creditor submit this matter to the Court on stipulation of facts (Dkt. 40) andbriefs (Dkt. 41 and 42). Chapter 13 trustee Laurie B. Williams appears by counselKarin N. Amyx and K-State Federal Credit Union appears by its attorney Martha

A. Peterson.
6 Dkt. 12.

Case 14-10847 Doc# 51 Filed 03/31/15 Page 3 of 7

was not a purchase money loan, and that debtor improperly classified and paid the
claim as a 910 car loan pursuant to the hanging paragraph of § 1325(a)(9)(*).7 Ms.
Bibbs amended her plan to provide for the traditional treatment of a non-910 car loan,
loan, bifurcating KSFCU’s claim between a $3,000 allowed secured claim, leaving the
the balance unsecured.8 KSFCU objects, claiming that the original loan was a purchase
purchase money loan and that by refinancing the debt within the 910 day window, it
it should be entitled to fully secured treatment under the hanging paragraph.9 The
Trustee responded that the original Loanliner agreement was outside the 910 day
period and this loan started the 910 counting period for the purpose of 910 car status.10


A glance at KAN. STAT. ANN. § 84-9-103 tells us that a “purchase-money
obligation” is one the borrower incurs for value given to “enable the debtor to acquire
acquire rights in” the collateral and that “purchase-money collateral” consists of goods
goods that secure a purchase-money obligation.11 In simple terms, if a lender loans
money to a debtor to purchase a car and that loan is secured by the car, the security
interest is a purchase money security interest [PMSI].

Congress enacted § 1325(a)(9)(*) in 2005.12 It requires debtors who had borrowed

7 Dkt. 22.
8 Dkt. 27.
9 Dkt. 30. KSFCU did not dispute the debtor’s $3,000 value of the car in its objection
to confirmation.
10 Dkt. 32.
11 KAN. STAT. ANN. § 84-9-103(a) (2014 Supp.).
12 This cited paragraph immediately follows § 1325(a)(9) and is commonly referred


Case 14-10847 Doc# 51 Filed 03/31/15 Page 4 of 7

borrowed money to purchase a vehicle for personal, family or household use within 910

910 days of the petition date to pay their car loan in full, regardless of the car’s value.

value. It accomplished this by making the provisions of § 506, which separates ordinary

ordinary secured claims into allowed secured and unsecured claims according to the

collateral’s value, inapplicable to these “recent” purchase-money loans.13 The so-called

so-called hanging paragraph states—

For purposes of paragraph (5), section 506 shall not apply to a claim
described in that paragraph if the creditor has a purchase money security
security interest securing the debt that is the subject of the claim, the
debt was incurred within the 910–day period preceding the date of the
filing of the petition, and the collateral for that debt consists of a motorvehicle (as defined in section 30102 of title 49) acquired for the personal
personal use of the debtor....14

In order for the loan to qualify for this favorable treatment in chapter 13, it has to have
been “incurred” within the 910 day look-back.

KSFCU argues that when Ms. Bibbs signed the refinancing note in 2012, she
“incurred” a purchase-money obligation within the look-back period. That she incurred
incurred an “obligation” within 910 days of filing is accurate; that the obligation was
was for “purchase-money” is not. She incurred a “purchase-money obligation” in
October of 2011, 921 days before she filed this case. Nothing that happened in October
October of 2012 altered the effect of the PMSI she granted in 2011. KAN. STAT. ANN. §
§ 84-9-103(f) codifies the “dual status rule” by providing that the renewal or

to as the “hanging paragraph” because it is unnumbered and modifies § 1325(a)(5).
13 In re Ford, 574 F.3d 1279, 1281.
14 11 U.S.C. § 1325(a)(9)(*), emphasis added.


Case 14-10847 Doc# 51 Filed 03/31/15 Page 5 of 7

refinancing of a purchase money obligation does not cause the PMSI to lose its status.15
status.15 The very modest change in these parties’ relationship effected by the second
second note in no way affected the purchase-money status that was created by the first
first note and security agreement. Ms. Bibbs “incurred” the purchase-money obligation
obligation when she bought the car, not when she signed the 2012 refinance note and §
and § 1325(a)(9)(*) pegs the 910-day counting period to when “the debt was incurred.”

No bankruptcy court has sided with KSFCU’s position and at least two have
held to the contrary. In In re Naumann, the court considered whether the nature of the
the refinanced obligation had changed from the original one enough to consider the
second note a novation as a matter of Illinois law.16 The court there noted that the loan
loan refinancing date was not the controlling date for determining whether to apply the
the hanging paragraph. Rather, the date upon which the obligation is “incurred,” as
both the UCC and Bankruptcy Code provisions say, is the date of the original
purchase-money loan.17 In In re Cunningham, the court looked to the definitions of
“purchase-money obligation” and “purchase-money security interest” in North
Carolina’s version of UCC § 9-103 to conclude that the date the purchase-money loan is
loan is made is the controlling date for determining when the 910 day look-back period

15 KAN. STAT. ANN. § 84-9-103(f)(3) (2014 Supp.). Likewise, the dual status doctrine
provides that PMSI status is not lost by the fact the car secured the full loan
obligation, including loan proceeds that were used for items other than the car
purchase money obligation. See § 84-9-103(f)(1).
16 In re Naumann, 2010 WL 2293477 (Bankr. S.D. Ill. June 8, 2010).
17 Id. at *4, n. 5.


Case 14-10847 Doc# 51 Filed 03/31/15 Page 6 of 7

period begins, not the date of refinancing.18 I agree with the reasoning in Naumann
and Cunningham and conclude that Kansas’s version of § 9-103 requires me to reach
reach the same conclusion here. Because Ms. Bibbs incurred the purchase money
obligation more than 910 days before filing her bankruptcy petition she is not required
required to treat KSFCU as a 910-car creditor under § 1325(a)(9)(*) and may pay the
the $3,000 value of the car as proposed in her amended plan.

KSFCU’s objection to Donita Bibbs’ amended chapter 13 plan is OVERRULED.
The trustee is directed to submit a confirmation order accordingly.
# # #

18 In re Cunningham, 2012 WL 1604686 at *3 (Bankr. W.D. N.C. May 8, 2012).


Case 14-10847 Doc# 51 Filed 03/31/15 Page 7 of 7

You are here: Home